Ch. 11 - Real Estate Financing

Johanna wants to get a loan to buy a house. When evaluating her credit obligations, which would a lender LEAST LIKELY consider as debt?

cell phone service payment wrong answers: car loan payment with 15 payments left / child support payments / credit card payments

Bill Jones signs a contract for the purchase of a single-family house for $350,000 and applies for a mortgage loan for $280,000. While performing a search, the title company retained by the mortgage company discovers that a previous owner had minor construction done on the property but never fully paid the contractor. As a result, there is a mechanic's lien filed against the property in the amount of $8,000. Which of the following actions can Bill take? Select all correct responses.

clear the lien by paying the $8,000 or negotiating for a lesser amount / cancel the contract and look for another house wrong answer: close with the title company making an exception for coverage of the lien

If you use this calculation when evaluating income—PITI / Gross Monthly Income—you have just determined what?

housing expense ratio - PITI (principal, interest, taxes, and insurance) divided by gross monthly income determines the amount of the borrower's income that can be used to pay housing expenses. Underwriters have a maximum housing ratio that can be used to approve a mortgage loan. wrong answers: loan-to-value / total debt-to-income / net income

The property's value is defined by the lender as the appraised value or the sales price, whichever is _________

less - A lender will hire a state-licensed or state-certified appraiser to estimate the value of the property being used to secure the mortgage loan.

Which of the following is NOT a debt that a lender would include in borrower Vicky's obligations when qualifying her for a loan?

life insurance premiums wrong answers: retail account payments / car payments / alimony payments

When qualifying for a conventional mortgage loan, which would a lender LEAST LIKELY count as allowable income?

occasional overtime

All of the following are durable sources of income that a lender is likely to include in determining a borrower's stable monthly income, EXCEPT

part-time earnings that have been part of income for at least 3 months - Part-time earnings are only considered durable if a borrower can show they have been a consistent part of earnings for at least one year. wrong answers: child support / retirement benefits / social security benefits

if the LTV exceeds 80% for a conventional loan, the lender will need to make certain that ________________ is purchased.

private mortgage insurance (PMI)

What provides the best protection against loss or damages from defects in title?

title insurance

After the abstract of title is complete, the title company issues to the lender and prospective buyer a ______________ or commitment of title insurance that identifies what conditions need to be met or resolved to receive a free and clear title.

title opinion letter

A __________ is the process of researching and finding the documents that evidence transactions and other events in the history of a piece of real property.

title search - More simply, a title search is conducted to determine that the seller of the property owns the property and has a free and clear title. A free and clear title has no burdens or claims on it, which means that no person or business other than the seller has an interest in, or claim to, the property.

Nicole has a stable gross monthly income of $5,400; her monthly bills include a car payment of $420 with seven payments left and a student loan payment of $220. What is the maximum mortgage payment (PITI) she would qualify for under both qualifying ratios if she is getting a conventional loan?

$1,512 - Under the housing expense ratio, she would qualify for $1,512 ($5,400 x .28). Using a debt-to-income ratio of 36% for a conventional loan, Nicole would qualify for a total housing expense of $1,944 ($5,400 x .36). From that, however, you need to subtract her recurring debt of $220 (there are fewer than 10 payments left on the car, so it does not count as debt), resulting in a maximum housing expense of $1,724. Remember that she can only borrow the lesser amount. Remember that she must qualify under both ratios, so she will be able to borrow only the lesser of the two amounts.

A borrower has a stable monthly gross income of $3,200 and recurring monthly debts of $370. What is the maximum amount of money available to him for monthly housing expenses to qualify for an 80% conventional loan?

$782

Abe's stable monthly income is $3,500. Every month he pays: $250 car payment, $100 student loan payment, and $50 gym membership. What is the maximum monthly mortgage payment he would qualify for on a conventional loan (assume a payment-to-income ratio of 28% and a debt-to-income ratio of 36%)?

$910 - Using the payment-to-income ratio, we get $980. But using the debt-to-income ratio, we find: $3,500 (income) multiplied by 0.36, which equals $1,260. From that, you subtract monthly debts ($250 + $100) which total $350 (the gym membership is not considered a debt since it can be canceled). So, this leaves $910.

Kelly's gross stable monthly income is $3,500. What is the maximum monthly mortgage payment (PITI) she would qualify for using the housing expense ratio of 28% for a conventional loan?

$980

Borrower Bob has a gross monthly income of $5,000 and total housing expenses of $1,000. What is Bob's housing debt-to-income ratio?

20%

Conventional lenders consider a borrower's income adequate for a loan if the proposed total mortgage payment of PITI does not exceed _____ of stable monthly gross income.

28%

Conventional payment-to-income ratio: _______ Conventional debt-to-income ratio: _______

28% / 36%

To calculate the maximum monthly payment allowable for an FHA-insured loan using the payment-to-income ratio, lender Keith would take the stable monthly income and multiply by

31%.

The sale price of the property is $160,500 and the buyer wants to borrow $120,000. The property was appraised at $155,000, and the lender requires an 80% conventional loan-to-value ratio. What is the loan-to-value ratio (LTV) for this transaction?

77% = 120,000/155,000

A brief, chronological summary of the recorded documents affecting the title to a particular parcel of real property.

Abstract of Title

A professional estimate or opinion of the value of a piece of property (parcel of land), as of a certain date, that's supported by objective data.

Appraisal

__________ is a term that states that someone's actions or negotiations are in good faith. For example, when a buyer purchases a home from a seller, the seller is expected to negotiate the price of the home in a bona fide fashion.

Bona Fide

A loan made by an institutional lender or a private party with real estate as security for the loan that the government neither guarantees nor insures.

Conventional Loan

The amount of money owed on a note or other promise to pay.

Debt

For an FHA or conventional mortgage loan, a real estate licensee might use the front- and back-end qualifying ratios to pre-approve a buyer client.

False - Earlier you learned about the difference between pre-qualifying and pre-approving. A licensee cannot pre-approve someone for a loan, but she would certainly want to know whether her buyer is a viable purchaser and might, therefore, want to walk through these ratios before showing houses.

The relationship of a borrower's total monthly housing expense to gross monthly income, expressed as a percentage (Total Housing Expense / Income = Ratio%). Also called Income-to-Payment Ratio or Front End Ratio.

Housing Expense Ratio

__________ is the total amount of money the lender can make from a loan in relation to the amount invested.

Lender's yield

Chris makes an offer of $180,000 on a house. He has $36,000 to put down. He uses an online mortgage calculator to find that a 30-year conventional loan for $144,000 at 5.25% would make the monthly principal and interest (P&I) about $795. If Chris has a stable monthly income of $2,850 and no debts, would he likely qualify for that loan using the front-end ratio?

No - With a stable monthly income of $2,850, and using the front-end ratio of 28%, the maximum mortgage amount for this borrower would be $798, but that is for PITI: Principal, interest, PLUS taxes and insurance. The given figure of $795 covers principal and interest only. Wouldn't you want to know what Chris can actually afford before you show him that $180,000 house?

Cash on deposit or other highly liquid assets a borrower must have in order to cover two months of PITI mortgage payments after they make the cash down payment and pay all closing costs.

Reserves

The amount of a borrower's income remaining after subtracting taxes, housing expenses, and all recurring debts and obligations; a factor when qualifying prospective borrowers for VA-guaranteed loans.

Residual Income

Income that can reasonably be expected to continue in the future.

Stable Monthly Income

A title insurance company.

Title Company

An inspection of the public record to determine all rights and encumbrances affecting title to a property.

Title Search

___________ is used to insure against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage loans. Title insurance defends against a lawsuit attacking the title or reimburses the insured for the actual monetary loss incurred up to the dollar amount of insurance provided by the policy.

Title insurance

The relationship of a borrower's total monthly debt to gross monthly income, expressed as a percentage (Total Debt / Income = Ratio %). Debt obligations include housing and long-term debts with more than 10 payments remaining. Also called Total Debt Service Ratio or Back End Ratio.

Total Debt-to-Income Ratio

A borrower who would be considered marginal for a conventional loan might qualify more easily for an FHA-insured loan. FHA allows a maximum payment-to-income ratio of 31%, which allows for a higher monthly house payment.

True

Lenders consider two ratios to qualify the borrower for a mortgage. The housing expense ratio is the borrower's gross monthly income compared to total monthly gross housing expenses of PITI (principal, interest, taxes, and insurance). A debt-to-income ratio is the relationship of the borrower's total monthly debt obligations (PITI and long-term debts) to income. Qualifying standards for conforming loans are 28% housing expense and 36% debt-to-income.

True

Qualifying standards for FHA-insured loans and VA-guaranteed loans, while similar to Fannie Mae and Freddie Mac, are more liberal.

True

The Uniform Residential Appraisal Report (URAR) is the predominant appraisal report form you will likely see and use as a residential mortgage professional. The URAR is referred to as Fannie Mae Form 1004 or Freddie Mac Form 70.

True

The Uniform Standards of Professional Appraisal Practice (USPAP)established and promoted by the Appraisal Foundation, dictates a number of standards, rules, and guidelines that licensed appraisers must follow when completing an appraisal report. Fannie Mae expects the appraisal report to include an analysis of the sales contract, property listing, and the sales history of the subject when the information is "reasonably available." This presumably means the appraiser must thoroughly search public records.

True

The VA allows a maximum total debt service ratio of 41%, which includes all debt payments owed.

True

The appraiser is trying to ascertain whether the transactions represent bona fide transfers at market value. If not, the comparables should not be used to support value

True

The front-end ratio, also called the housing ratio, shows what percentage of your income would go toward housing expenses, including your monthly mortgage payment, property taxes, homeowners insurance and homeowners association fees, if applicable

True

This is why an appraisal is only valid as of its effective date, which establishes terms, conditions, and economic circumstances upon which the value is estimated.

True

To ensure a borrower has sufficient income to repay the debt, the lender will first consider the borrower's stable monthly income, which is Any income that can reasonably be expected to continue for the foreseeable future. Usually based on the borrower's gross monthly income(before any taxes or other deductions). Verifiable by the borrower's employer and federal tax returns.

True

Total Debt / Gross Monthly Income = Ratio %

True

When lenders first meet with a potential borrower—either for pre-qualification or pre-approval—they will likely perform an analysis of the current or allowable monthly housing expense based on the borrower's income and debt.

True

a lender must also complete an analysis of the loan itself. For example, the lender will need to consider does the loan meet the criteria necessary to be sold within the secondary market.

True

Conventional lenders want to be sure the borrower's housing expenses plus other recurring monthly debt do not exceed 36% of stable monthly income. For example, Ralph has $2,900 in stable gross monthly income. You would multiply $2,900 by designated percentage, 36% (0.36) in this example, to calculate the total debt-to-income ratio. The maximum total debt allowed for Ralph would be $1,044. That doesn't mean that he would qualify for a $1,044 monthly mortgage payment, though! We have more work to do. Let's say that Ralph has a monthly car payment of $325 as his only debt. Now you need to subtract this known monthly payment from $1,044 to find out the maximum monthly mortgage payment that he would be allowed: $719. The total debt-to-income ratio is a more realistic measure of the borrower's ability to support the loan payments because it takes into account all of the borrower's recurring financial obligations.

True - Of course, if Ralph paid off that car loan, thereby reducing his total long-term monthly obligations, he would be able to qualify for a larger mortgage payment.

Individual who evaluates a loan application to determine its risk level for a lender or investor; final decision maker on a loan application.

Underwriter

Cathy is applying for a loan to purchase a condominium. Would a lender include her monthly condo association fees as part of the PITI?

Yes - When the collateral property requires association fees as a condition of ownership, for example as with a condominium, that monthly amount must also be added to PITI to get the complete housing expense.

a title company prepares an ________________, which is a brief summary of what was discovered during the title search. The abstract of title is a document that provides information about the history of the legal title to the piece of real estate with the goal of demonstrating that the title is clear.

abstract of title

An __________ is defined as an estimate or opinion of value as of a certain date that is supported by objective data. There are many important concepts in that short definition. First, an appraisal is only an estimate or opinion; it is not a guarantee of value.

appraisal